Tag: absorption

It’s time for a midyear review of our real estate markets in Texas. This week we will start with what is happening in Central Texas and San Antonio. The underlying theme is the continued job growth in Texas and all the benefits it brings.

Not only does Texas have a rapidly growing job market, it also has an exceptionally large GDP of $1.5 trillion in 2013. It was second highest nationwide last year and greater than the combined GDP of the following nine states combined. GDP growth exceeded the national growth rate by a large margin in each of the last three years.

By most measures, including employment and economic output, Texas recovered from the recession a couple of years ago. Booming oil production is named as one of the largest factors contributing to the economy’s strong growth. The mining industry, which includes oil production, accounted for 13.5% — well over $200 billion — of Texas economic output, five times the sector’s contribution to the national output. But over the last 15 years over 40% of all jobs have been created in the health and education industry. Texas total nonfarm employment increased by 64,100 jobs during April 2014. Between April 2013 and April 2014, Texas total nonfarm employment increased by 348,000 jobs or 3.1 percent.

The Texas unemployment rate was 5.2 percent for April 2014, down from 6.4 percent a year earlier in March 2013. The Texas unemployment rate has been at or below the national rate for 88 consecutive months / 7+ years. The second part of that story is the lack of inventory in most real estate channels and the continued buildup of demand.

San Antonio

Home to one of the largest medical facilities in the nation, San Antonio has seen strong job growth from military medical operations. This is welcome news as the national defense budget has been cut dramatically. Ambulatory health-care services combined with new technology has created more than 12,000 jobs over the last five years and looks to continue for a while. Medical isn’t the only thing driving development. San Antonio is also home to the largest oil and gas development in the region in the Eagle Ford Shale. Record drilling levels and high-yield wells are pumping new jobs into energy and related sectors. In San Antonio the real estate downturn wasn’t as severe as in the rest of the nation. Government presence (three large military installations) has somewhat protected the market. However the lack of job growth (a net positive of 1,000 jobs over the last 12 months) in 2013 put a drag on optimism and the local economy.

The local housing market continues to improve with home resales increasing in value but with volume nearly identical to last year. Resale inventory is at 4.5 months (6 months is considered equilibrium) making it a seller’s market. New home starts followed a similar path with a slight increase in volume, but values improved dramatically. New home sale has seen an improvement in the upper end with luxury housing priced $300,000-500,000 dramatically improving 33%, and homes over $500,000 are 28% over last year.

In most markets developed lot inventory has been the biggest challenge. San Antonio lot inventory has increased each of the last three quarters thereby increasing the overall lot supply from 17,002 lots in 2Q13 to 18,384 lots as the end of the first quarter of 2014. This has helped to stabilize values and lot inventory and provide relief to high demand areas that saw their lot supplies diminish over the last three years. After 7+ years of little appreciation, land, labor and material are driving up the cost of lot development. This ‘catch up’ value increase has pushed the San Antonio affordability ratio where it is now virtually impossible to reproduce lots for new housing priced under $175,000.

Renter-household formation continues to be strong as broad-based employment growth continues to boost the San Antonio economy. The Alamo City is particularly benefiting from jobs generated by the nearby Eagle Ford Shale. Oil-field service companies have created thousands of jobs, bolstering hiring in a broad array of sectors including professional, health, education, and government. These jobs will support the addition of a projected 65,000 new households between 2012 and 2017, boding well for apartment operators. Wanting to capitalize on surging demand, developers are bringing 4,700 units to the market this year, concentrating on the Broadway corridor, northwest and north central San Antonio. In addition to the boom of the oil industry, the northern region is home to major employers such as the University of Texas at San Antonio, USAA and the Medical Center District. Although construction market wide is significant, strong demand will put downward pressure on vacancy, resulting in continued moderate rent growth.

The San Antonio apartment market is strong for a San Antonio market. While a 91.5% occupancy rate may seem low in other cities, San Antonio’s stability at this rate continues to attract investors. In the past four years, there has been over 13,250 new units added to the local inventory, yet occupancy has fluctuated minimally, showing less than a 4% difference between the highest and lowest occupancy rates during that time. In addition, rental rates have continued to creep up, increasing almost 20% over the four-year period, to reach a current record high of $0.99 per square foot. With this stability developers are enthusiastically building in this market and investors are eager to buy. There are currently 10,846 units under construction in San Antonio. In addition, the next 12 months are expected to see approximately 7,900 more units break ground. Much of this construction remains concentrated in the northern and western outskirts of the city where demand is strong. While this area was previously undeveloped, and thus, under-served by the multi-family market, there is a concern that these areas may become overbuilt. Occupancy rates have remained relatively flat, increasing only .26% during the quarter. If this was indeed the case, expect occupancy levels to increase a bit more dramatically during the second quarter, as new unit additions should be less than the 1,520 units added this quarter.

Expect to see apartment construction continue at a brisk pace, while occupancy rates should increase during both the second and third quarters. Rents will continue to creep along, while investor interest will remain high, fueling additional sales.

Office construction will remain below the five-year average in 2014, due to continued office surplus in the CBD. Northern San Antonio receiving most of the new inventory as employers seek locations near the growing employment base. Class A office vacancy in Northwest San Antonio has fallen since peaking in late 2011, and a number of speculative developments are underway. In far West San Antonio, the presence of major corporate data centers including Microsoft, Chevron, and Valero motivated Stream Data Centers to build a second facility in the region. Through all this the improving office and greater space demand has put upward pressure on rents this year.

Local and out-of-state buyers will target traditional office properties in the North San Antonio, Northwest, Far North and Far West submarkets. Proximity to the large employers such as the medical district and universities will keep these submarkets desirable to investors. On average, first-year yields in San Antonio start in the low-7 percent range for Class A assets, while Class B properties typically trade in the low-8 to low-9 percent range.

Positive momentum will increase investor competition, placing upward pressure on prices and encouraging sellers to bring assets to market. Last year, listings were limited and almost exclusively Class B properties. Though available inventory is tight, it will expand as merchant builders and impending loan maturities boost listings of Class A and Class C assets. Generally, Class A units change hands at cap rates in the high-5 to 6 percent range, while Class C properties start trading in the high-7 percent range. Investors with a high risk tolerance will target outlier markets such as New Braunfels and Boerne where cap rates trend higher. Acquisition financing is more available as regional banks, flush with cash flow from Eagle Ford Shale, are playing a more active role in smaller unit lending.

The technology strength is obvious to those that live in San Antonio, with the explosive growth of Rackspace and Geekdom. The city was ninth in job growth over the last five years. A nationwide restructuring of military bases could lead to many new jobs. So on many fronts those looking to find opportunity have a lot of options in the Alamo city.

Austin

The Austin metro area continues to get plenty of positive economic press. Nationally, Austin has come in the top five major metros for job growth over the last five years, due in large part to a more diversified economic base. Homegrown tech companies like Dell, National Instruments, as well as foreign investment such as Samsung (with the largest foreign investment in the US in Austin) and others complement incoming companies like Apple and IBM (which both now have large bases in Austin), as well as startups coming out of the University of Texas. When you look at the explosive growth of new tech companies such as Homeaway, Bazzarvoice, Invoto and many others, the economic future is obvious.

Austin is one of the strongest residential markets not only in the state, but the nation. Austin-area homes continued to sell at an accelerated rate, decreasing the average days on market by five days year-over-year, down to 45 days in April 2014. At the same time, monthly housing inventory decreased 0.4 months year-over-year to 2.3 months. (Six months is equilibrium – above six months it is a buyer’s market, below a seller’s market). The market also featured two percent fewer new listings, three percent fewer active listings, and six percent fewer pending sales in April 2014 compared to the same month of the prior year.

More than 11,000 apartments are scheduled for delivery in the next 12 -15 months, which will put upward pressure on market wide vacancy during lease-up. Normally, more units increases vacancy rates, but due to Austin’s 95+/-% occupancy, rent values continue to improve, although not as rapidly as the last 4 years. The local rental market remains tight with rent values increasing. The balance between buyers and sellers in the market will begin to align this year, though multiple bids per listing will remain commonplace in the early part of 2014. A number of factors will materialize that encourage apartment owners to divest in the coming months. Rising interest rates will place upward pressure on cap rates, signaling to some investors that the market has peaked. As the year commences, cap rates are generally in the low-5 percent area for core listings and move up to the low-6 percent range for 1980s class ‘B’ assets.

Austin’s decision to back a new medical school that will open in the fall of 2016 will help attract many more in the medical field – research, as well as support industries and practitioners. Partnering with the university and the strength of the other medical centers in Texas will allow the state to become much more attractive on a global scale to many. Couple that with the nation’s aging population, you can see the strength of the economic argument.

Austin business leaders plan is to maintain its high-flying output over the next number of years as it focuses on clean technology, data centers, digital media, biosciences, and other industries.

In addition, other real estate channels such as office are benefiting from the strength of the market. Several recent corporate relocations and expansions in the thriving high-tech economy will push down vacancy in Austin this year. Google Fiber will also make its debut in the market, providing resources and opportunities for further development of high-tech industries. Builders are increasingly optimistic, capitalizing on strong demand by proceeding with several build-to-suit and speculative developments in the CBD and northwest Austin. The CBD will be home to the new IBC Bank Plaza and Colorado Tower, which will collectively add more than 565,000 square feet of office space.

Construction of the Dell Medical School at the University of Texas will attract and spur the development of healthcare and ancillary services in the CBD and university area and has already affected values east of I-35. Additional expansions will result in the highest net absorption in five years, allowing operators leverage to raise rents. Close to 2 million square feet of additional office space has been announced for development. With current employment growth, current office projections and absorptions seem to keep ahead of demand.

Substantial employment growth and improving operations will draw additional investors to the Austin market this year. Local buyers will target value-add opportunities in suburban submarkets, including Northwest and Southwest Austin to capitalize on upside potential. These assets generally trade at cap rates near 7.5 percent. Properties with less than 50,000 square feet will account for the majority of these transactions

In future weeks we will review the other major Texas metros and cities and see where they stack up in comparison.

Texas is a state that is seeing great job creation and a better-than-national real estate market, and both metros reviewed are truly blessed with good absorption, lack of supply, strong rentals, etc. Sales and appreciation have increased, but if you look over the last 5 years, it has been stable and comfortable growth current projections show that trend continuing.

Texas continues to lead the national economic recovery. Home prices are on the rise, businesses are relocating here, and jobs are being created. I wanted to revisit the major Texas metros and examine all channels of real estate to really show how well we are doing.

First, understand that the median price for homes in the state of Texas hit another all-time high in the second quarter of 2013 as demand for homes in the Lone Star state continues to rise as supply struggles to keep up. On a statewide basis, 79,760 single-family homes were sold in the second quarter of 2013, up 17.78% from the same quarter of last year. This also represents the most homes sold in a single-quarter since the Texas Association of Realtors began this report in 2009. Austin had their best month ever since records were started in the early 1960’s, with 3,135 single-family homes sold in the Austin area, which is 35% more than July 2012.

To put that in perspective, realize that there were only 6,100 listings, so a little over 50% of all listings sold in central Texas. San Antonio had a record month with 2430 listings sold, over a 24% increase in sale over a year ago. Dallas had a record month with close to 9,400 home sales in July. Houston also had a record month. In Texas, demand in the state was strong as ever, with 43 out of the 47 markets included in the report showing an increase in sales year-over-year.

More homes are selling, and for higher prices. The median price in Q2 2013 was up 9.98% from the prior year, reaching $177,300. The average price rose 10.44% from the prior year to $235,075. According to the Texas Association of Realtors, those are the highest figures for median and average price ever seen in Texas real estate. All of us living in one of the Texas metros sees or hears about the strength of the residential market, with home values increasing at around 10% this year.

The economy is booming with job and population growth. And, for the first time perhaps ever, home values are appreciating at double digit rates. We don’t believe this will last forever. But for a limited time, we have the opportunity to experience what the rest of the country has had in appreciation in the last boom and now.

Houston
Houston’s economy continues to remain well positioned with over 99,000+ jobs created this year. This continued increase in employment will feed housing, office, and retail absorption. The rapidly expanding energy and medical sector are the major economic catalysts for Houston. New and resale residential properties are doing well, with the lowest supply of homes on the market since December 1999. Houston is leading the nation in home starts, adding pressure to an all ready tight market. 2013 should bring in excess of 27,000 starts. This is still far below the boom days of 2006, when home starts neared 50,000, but a strong recovery compared to other cities. Rental rates are also way up — in office towers, in apartments, warehouses and even for people who are leasing single-family homes.

Metro wide, over 9,200 apartment units are under construction with another 20,000+/- planned. While new apartment supply continues to increase, demand is outstripping development, putting pressure on rents, particularly in class A complexes. With the potential of overbuilding, and with average Class A vacancies below 7% and rents spiking, developers have been hustling to be first in line to bring new multifamily product out of the ground and to the Houston inner loop market. Apartment absorption has caught up with new construction, shown by the 92% occupancy citywide, even though there was a 77% increase in construction the last twelve months rental rates have increased 5%. With the continued strength of the market, we see sales continuing to improve particularly in the B and C class with apartment communities that have less than 100 units.

Over five million square feet of new office space will be delivered this year. That said, vacancy rates stayed stable with not a dramatic increase in the 85% occupancy even though over twice the amount of space as last year was brought to market and rents continue to increase. With the strength of the energy sector and all its support industries, CBD and the energy corridor have put pressure on raising rents. That has been offset by slower interest in non-core areas such as Greenspoint where office leasing continues to be a challenge. Because of the strength of employment, many institutional investors continue to show high interest in core office space. Sales velocity increased more than 50% over the previous 12 months.

With over two times the national employment growth, retail continues to buck the national trend. Retail rents and sales continue to improve with a conservative (220,000 sq ft in 2012 and 240,000 in 2013) amount of space coming on the market. There has been a flight to quality on the loops and areas of high housing growth which should continue into 2013.

San Antonio

San Antonio employment grew this year by 32,000 jobs, or a 3.6% increase. San Antonio’s future continues to look bright, thanks in part to the strength of oil and gas production in the Eagle Ford Shale, which continues to strengthen renter demand in south SA and counties south of the city. In the northwest and west, Nationwide’s new campus along with expansion in the growing bioscience sector will continue to drive the market.

Apartment leasing is still strong at just under 95% occupancy and rents and sales are still rising, even with over 4,000 units coming on line this year, another sign of a good market. Rising construction costs, particularly framing and lumber may slow down development with lower paying industries adding jobs primarily. There is some chance of higher vacancies with the amount of units coming on this year.

Office continues to be a bit challenged compared to other Texas metros, with 85% occupancy and the hardest hit classes being b and c class properties. This is due primarily to corporate relocations and owner-occupied and/or build-to-suit properties. That said, rents are stable with a little rise, due to the Eagle Ford Shale play south of SA. Corporate relocations to owner occupied and build-to-suit have caused office vacancies to increase over last year. However, the strength of the Eagle Ford Shale play and stronger housing market conditions are working to revive previously stalled developments.

Eagle Ford drilling has had a dramatic effect on boosting retail in San Antonio. San Antonio experienced a spike in buyer demand as in Class A properties, which in turn has encouraged more sellers to enter the market. Rents continue to rise despite the fact that occupancy dropped just over 1% due to over 400,000 sqft coming to market. Retail should continue to improve with modest increases this year, as continued job growth in most sectors has allowed San Antonio families an increase in spending in San Antonio. Most tenants are concentrating in areas with high home sales and job growth, causing retail space demand to exceed supply this year, gearing the market toward healthy vacancy improvements and modest rent growth.

Dallas / Fort Worth

The DFW economy has turned the corner with over 96,000 jobs created last year, a 3.2% increase. Of all four major metros, D/FW has lagged behind the others in returning to prerecession employment. However it is doing better than most of the country at 99% recovery. The economic slowdown and hesitancy to build is apparent in the tightness of the market.

With apartment occupancy at 94%, and a limited number of new apartment communities coming on line (13,500+/-), rents should continue to rise and lease negotiation should remain firmly on the sides of the landlords. While this is sizeable increase from 2012, when just fewer than 7,500 units were delivered, the market remains 25+% under the metros cyclical peak in 2009. Construction was slower than other Texas metros till 2012 because of the competition from the large amount of foreclosures. Now that these have largely disappeared, the market is prime for growth.

The DFW office market continues to post improvements in occupancy as new supply continues to stay current with demand. Over 2.6 million sq. ft. will come online this year, more than doubling last year’s output of 1.2 million square feet. DFW vacancy is still challenged at 80 to 85% occupancy. However, with 80% absorption of new product this year, rents are still improving for lessors. Dallas offices include the homes of 24 Fortune 500 companies. Demand for retail continues to tighten the market. Over 2.1 million square feet of new retail space is planned to be finished by the end of 2012, a 100% increase over last year. Occupancy is good at 90% and should continue to improve with the uptick in housing demand in the outlying suburbs. Commercial real estate in rural Texas towns has also improved from demand in the energy sector as evidenced by the strength of rents south of San Antonio and in the energy counties around Midland/Odessa. Barring a catastrophic event in the Texas economy, we should continue to see strength in most portions of the commercial market in our state. With an improving market, office sales have improved 40+% with over 50% of the transactions being under 50K sq. feet.

With improved employment, over 800,000 sq ft of retail space will be delivered to the market, and another 4 million planned. Rents are slowly improving even though vacancy has grown to 12.8%. Buyers are pursuing high quality, triple net in prime locations. The trend should continue till saturated, and the attention will turn to the lower rated tenants and locations.

Austin

Austin continues to be an economic success story in the face of nationwide uncertainty, with employment at an estimated 4% annual growth rate and the addition of 33,700+/- jobs annually. Austin is coming off of their best home resale market since the records started in the 1960’s. Austin has an extremely limited supply of resale homes – 2.6 months of inventory, which is a 40% decline from a year ago. Residential and commercial rents continue to rise due to lack of supply.

Austin apartment owners are in an enviable position with 94+% occupancy, even with 9,000 new units coming on line. Almost all channels of Austin’s economy are comfortable at or above prerecession values and income. Apartment sales continue to improve with almost a 40% increase in sales from 2012. Median prices have improved to $86,500. Compared to a cyclical low in 2010, the median price per unit has increased approximately 80%. With the good fortune of job creation, drawing over 60,000 people per year to the Austin area, the market should continue to hold its values and strength. Asking rents will continue to rise 5% or more, which means the housing affordability gap has closed for class ‘A’ renters with upward pressure on ‘B’ and ‘C’ renters.

With employment improving 4+% annually, office space continues to see rents and sales improve even as occupancy drops to 88%. Of the 520,000 sq. ft. being delivered this year, over 45% is medical. Medium sized transactions of 50,000 sq feet or less accounted for the majority of the activity this year and the potential of continued strong values in sales and rents over the next few years seems probable.

Retail continues to be challenged nationally as evidenced by the downsizing of most retailers, except grocery and medical. That said, local retail is doing ok with approximately 120,000 sq feet brought on line this year. Rents and sales should continue to rise with some concessions.

The bottom line is that our metros offer the amenities and economic stability that so many investors are looking for. Texas real estate will continue to grow as individuals and businesses move here. The bottom line is the same across all channels: the property you look at today is going to be more expensive or gone tomorrow.

This week we had the good fortune to attend the 2013 housing forecast by the Austin Home Builders Association and the Austin Board of Realtors.

Although the discussion was centered on Austin, the majority of the statements apply to what is happening in all Texas metros. Here are some of the major points about Austin from the fifth annual HBA/ABOR forecast.

Dr. Jay Hartzell, Chair of the Department of Finance in the McCombs School of Business at UT Austin gave us an overview of the world economy. As strong as our regional economy has been, it’s easy to forget that going into 2013, the global and national economy were still trying to shake off the fallout from the crisis of 2008-2009.

However, despite concerns about looming tax increases and government spending cuts, American employers added 155,000 jobs in December. Employees also enjoyed slightly faster wage growth and worked longer hours, which could bode well for future hiring. Job growth, almost exactly equal to the average monthly growth in the last two years, was enough to keep the unemployment rate steady at 7.8 percent, the Labor Department last Friday. But it was not enough to reduce the backlog of 12.2 million jobless workers, underscoring the challenge facing Washington politicians as they continue to wrestle over how to address the budget deficit.

Economically, we should continue to will feel the contrasting drafts of a retrenching uncertain government arm and a reviving private sector in 2013. The continued uncertainty of Washington will cause stiff fiscal headwinds during the first half of the year, stymieing growth for the first half. But by the second half, private business will continue their investment as well as bank lending and household spending on cars, homes, and the supporting industries.

Tougher mortgage lending rules
Tim Fisher, President of the Texas Mortgage Bankers Association, spoke about the future of mortgage financing, specifically rules and regulations put in place by the 2010 Dodd Franks financial regulatory bill. In short, mortgage lending isn’t going to get any easier. The upshot of this regulation is that banks are likely to narrow their loan offerings and rely more on thirty year fixed rate mortgages, a product unique to the US and one that has required a government guarantee. Currently, over 95% of all loans are backed or controlled by government backed agencies, which is something the Federal government would like to get away from.

The CFRB (Consumer Financial Protection Bureau) released new mortgage rules for qualified mortgages on Thursday of this week. The new rules come at a time when regulators and banks are trying to find a middle ground between overly lax and overly tight lending standards. For years the lending pendulum has never been just quite in the middle, either too lax or too harsh. 2013 looks like it will swing to the harsher side.

However, over a decade ago, mortgage lenders began broadening their base of customers (at the governments urging) by offering an array of exotic loan products with esoteric names: Subprime, Alt-A, low-doc and no-doc loans, and interest loans that required little to no verification or documentation to qualify. These loans went to millions of borrowers who ultimately couldn’t pay for them, and resulted in one of the worst financial crashes in the world in history.

The new guidelines and harsher parameters for both buyers and lenders will in all likelihood make it harder to qualify for a loan and from a lender standpoint, harder to lend. Because of this, mortgage lending will be a more difficult environment through 2013 – the bottom line is that it will be harder to qualify than it has in many years, slowing down home sales.

Eldon Rude, Metrostudy’s Director of the Austin market, discussed our local market and where it is headed for the year. Some of his major points were:

– The housing economy began to rebound this year both in absorption and prices
– Home sales, car sales, and retail sales are rebounding
– Real estate construction is underway. Drive around South Lamar, West Campus. Drive your new home communities. There is a lot going on.
– More people working – as discussed last week, Austin at 5% unemployment is truly blessed. But then so is
the whole of Texas, our state and major metros unemployment number continue to lead the nation

– Five years of pent up demand
– Americans have credit capacity again

Austin really saw the housing market continue its recovery in 2012, with strong increases in sales for both previously owned homes and new homes. Market watchers expect housing’s growth to continue through at least the next two years. But the industry faces challenges that include a still-shaky economy, a potentially tougher financial regulatory climate, and already-noticeable shortages in labor, finished lots, and building materials that will impede growth if they get worse.

That said, 2013 will be the year most remember as the first solid year of recovery for most of the country. Here in most of the Texas metros, consumers and realtors are likely to remember 2013 as the year when the real estate industry finally showed life after six years of dismal news.

Activity is expected to remain strong in 2013 as robust job growth, rising apartment rents and historically low mortgage interest rates result in more demand for housing in the Austin region.

Job growth
Driven by continued employment and population growth, the Austin economy should continue to outshine the rest of the nation. Analysts estimate that the region’s employment rate will experience a 3% growth rate while adding approximately 60,000 new residents annually over the next two years. This equates to around 30,000+ new jobs annually. This growth will bring Austin’s SMSA population to totaling over 1.9 million in total in the next two years.

Where is the job growth? While traditional employment leaders in Austin such as Dell and Advanced Micro Devices either contracted or remained flat in 2012, Apple, Samsung, Cirrus Logic, Intel, Mutual Mobile and Calxeda experienced growth. All have a part to play in the growth of mobile technology such as tablets and smart phones. This year Visa, Inc. announced that it was building a worldwide data center on Research Boulevard that is expected to staff almost 800 employees. General Motors is creating a 500 employee information technology center in Austin as part of the company’s push to use computer know-how to actively transform how the giant carmaker does business. 2013 should continue the streak of announcements improving Austin’s employment growth.

Because of this job growth, Austin’s rental market remains tight – this job growth puts pressure on development. In the last two years, the Austin apartment market has experienced strong increases in both rent and occupancy. As a result, rents have reached a historic high of $1.05 per square foot, and the current occupancy, at 96%, mirrors that seen during the heights of 2000. Annual figures show these numbers to be a 2.4% gain in occupancy and a 6.8% increase in rents. This leaves just under 4,000 rental units left for the 60,000 new Austinites when they move here. Even with the planned 8,800 units being delivered in the next 12 to 18 months, there is not enough units to house those moving here.

Limited inventory
As discussed above, not only have our local residential housing markets stabilized, but we have begun to see limited inventory in resales and new construction. Although it’s been a good year in resales (over 25,210 sold, nearly a 20% increase year over year) the amount of inventory currently offered in total is just over 5,700 units, 20 percent less than November 2011. Since this covers all price points this obviously is not enough to address demand.

New homes are just as challenged with lack of enough inventory. 2012 ended up at 7,981 starts, almost 700 more than previously projected. Eldon and Metrostudy are projecting the new home market could do as many as 9,000 starts in 2013 if there are enough ‘quality ‘ lots for the homebuyer.

The lack of developed lots and land continue to be the story for the Austin market. More housing starts in 2013 with less than an 18 month supply and little in the development pipeline. Remember it traditionally takes about two and a half years to buy a piece of land, get it entitled, and start construction of homes. So, anything bought today will take at least that long to come to market.

Labor and materials
Also limiting inventory is the construction labor shortage. This shortage is not only increasing the price of labor and putting pressure on margins, but also it is increasing the time it takes to build a house. The median labor wage hike nationally as well as locally is around 4+%, with a maximum of 15%. The slowdown and recession caused by the housing bubble forced many construction workers to move on to other jobs and put many production builder companies and subcontractors out of business. Labor will be more expensive.

In addition, because of the added demand materials are rising in price. The chart below shows how lumber has climbed as demand increased and the ability to increase production is not there. It’s not just lumber, all materials are seeing an increase in demand therefore putting pressure on prices. Don’t expect the discounted values of the last five years when looking for a home.

Construction and development costs will increase further in the time it takes to start and finish homes. A survey of builders locally, (and by no means scientific) shows that the average time it takes to start and finish a home in Austin, from start to finish, has climbed from four months to over five months. Some of the delays are being caused by shortages in the concrete and framing trades, causing problems in even the first construction phases. But not all of the start delays are being caused by worker shortages. It’s also taking builders longer to get permits because local municipal governments have cut staff. Getting first-time home buyers qualified for loans is another cause for delay. it has already begun to impact the time it takes to start and finish homes.

This is life on the other side of the housing crash. Home starts are climbing, prices are up, and builders can’t find enough workers.

Austin and Texas have been adding construction jobs since mid-2012, and some builders still can’t finish homes on time because framers, plumbers, and even cleanup crews are in such demand. Many skilled workers from before the recession have moved to better paying oil and gas jobs or moved back to Mexico. Potential new workers failed to get into the pipeline, because construction woes dragged on for so long.

As you can see by the chart below from Metrostudy, home prices in Dallas, Houston, Austin, and San Antonio have continued to increase.

Also compounding construction is that newcomers aren’t arriving from Mexico, at least not like in the past. They used to be a crucial labor source for the fast-growing business. Builders and subcontractors don’t want to be quoted on immigration, because it’s such a political issue, but they believe it’s a big factor in the labor shortage.

In April of 2012, the Pew Research Center estimated that net migration between the United States and Mexico had flattened and perhaps reversed from 2005 to 2010. In five years, slightly more people moved to Mexico, Pew said. A decade earlier, in a similar five-year period, almost 2.3 million more moved from Mexico to the U.S. Pew attributed the recent standstill to many factors, including the weak construction job market, tougher border enforcement, and a rise in deportations. As the economy picks up, the wave of Mexican immigration could resume.

Builders are hoping and counting on it. They’re OK with the labor shortage, partly because it’s better to manage a growing business. But they also hope it’s a temporary condition. As word spreads, they expect labor markets to respond, whether from the unemployed, other states, or Mexico.

Six years ago, housing starts peaked in Central Texas and then slowed. Only recently has the recovery looked solid and sustainable, so it actually feels good to have a labor shortage. Texas is ahead of the curve. While hiring here is up 5 percent in 2012, construction employment nationwide has been wallowing around the bottom for more than two years. As the market improves nationally, it will but pressure on raising labor prices which have been stagnant the last 6+ years, again adding to the cost of homes and construction.

There are potential hurdles this year. 2013 in Austin will start strong on home sales, but the rest of the nation will be slower through the first six months caused by the fiscal debate and the tightening mortgage climate. Locally, the availability of developed land and resale inventory will continue to be a challenge for buyers and another reason for sellers to raise prices.

Even with the hurdles mentioned, 2013’s forecast for Austin and the rest of the state will be head and shoulder above the remainder of the nation.

Texas continues to outpace the US in job growth, driving Texas real estate

The Texas economy continues to grow at a rate higher than the national average. The state gained 261,000 nonagricultural jobs from August 2011 to August 2012, an annual growth rate of 2.5 percent compared with 1.4 percent for the United States. The state’s private sector added 270,900 jobs, an annual growth rate of 3.1 percent compared with 1.8 percent for the nation’s nongovernment sector. Or as we have said many times before, one out or four jobs in the nation have been created in Texas since the recession

The Texas growth narrative is well-known by now. Texas’s population grew by 11 million people (79 percent) between 1980 and 2011, more than double the rate of growth of the nation as a whole. With that population growth came job growth. Since the 1990s, the rate of Texas job growth has been a full percentage point or more above the national average most years.

Texas’s rapid population growth has been a major driver of the state’s economic growth over the last several decades. The vast majority of the state’s growth is the result of two factors specific to Texas: The state’s relatively high level of “natural growth,” i.e. births minus deaths; and international immigration, much of it from neighboring Mexico.

Specifically, Texas has the nation’s second-highest birth rate (after Utah), which researchers attribute to a variety of demographic, socio-economic, and cultural factors. Texas is also a major entrance point for immigration from Mexico and Central America to the United States. International immigration provides Texas a steady base of population growth. Between 2000 and 2009, more than half of the net migration to Texas was from Mexico and other countries (according to the Office of the State Demographer “Texas Demographic Characteristics and Trends” presentation February 3, 2012; and U.S. Census Bureau, Components of Population Change).

Most recently, about 72% of Texas’s net population growth last year resulted from international migration and natural growth, according to the Census Bureau; the remaining 28% percent resulted from net domestic migration according to CBPP calculations of Census data. This population growth in turn has caused job growth. Population growth has fueled demand for housing, goods, and services such as education. This increased demand has spurred expansion of businesses, schools, and so on, creating jobs in both the private and public sectors.

Commercial and residential real estate in Texas and other regional states, which never rose too high or fell too far, is now benefiting from the region’s hot economy.

In some of the states, you could even say real estate is a well-oiled machine — energy production in the central U.S. has helped bolster the region, as seen in the states’ low unemployment. People in the region, simply, are working.

In Texas, here’s how that translates into housing and real estate prices. Each of the state’s major metro areas — Houston, Dallas/Fort Worth, Austin and San Antonio — saw minimal declines in the bust and are essentially fully recovered.

Each metro area has its own economic strengths that diversify the state’s economy beyond the energy sector, like high-tech and government in Austin or tourism and the military in San Antonio. The diversity of the Texas economy has helped drive job growth and demand for real estate in all metros, with thee out of the four metros, Austin, San Antonio and Houston recovered to pre-recession employment and better. DFW is at 97% of pre recession numbers.

Low cost of living and low housing prices

Another major contributor to Texas growth is that the cost of living is considerably lower than the national average. Housing, which represents roughly one-third of a typical household’s spending, is particularly inexpensive.

Texas has the second-biggest land area in the country, much of it quite flat and thus available for development. The supply of land keeps prices low and makes it considerably less expensive to start a business or build housing than in many other parts of the country. Texas has by far the most open land among the nation’s most populous states. The population density of Texas is less than half of that of California, less than one-fourth of New York’s or Florida’s. These four states account for over 30% of the nation’s population.

There is some debate about why housing prices did not soar in Texas along with the rest of the country. Texas had the lowest appreciation in 2005/2006 in the country according to OHFEO. Whether it was because Texas was the last state to allow homeowners to borrow against their homes through equity loans and placed strict controls on the amount they could borrow, or whether it was the plentiful land or some other reason, there is no doubt that Texas did not face the boom and bust in housing that preceded the 2007-2009 real estate recession in many states.

In addition to keeping real estate prices low (particularly housing), the absence of a housing price speculation bubble (and subsequent implosion) benefitted the Texas economy in other ways. The mortgage foreclosure rate soared in other states but has been much lower in Texas. The Texas foreclosure rate was one in every 1,203 mortgages in August 2012, just 60 percent of the national rate and less that one-third the rates in Nevada, California, Arizona and Florida. As people in other states were losing there homes and equity, Texans were largely spared from the economic fallout.

Employment drives the local real estate economy, and commercial real estate is a good indicator of employment trends. Let’s look at commercial real estate in the major Texas metros.

Austin is an economic success story in the face of nationwide uncertainty, with employment growth at 3.6% annual growth and the addition of 29,000+/- jobs annually.

Austin’s apartment inventory will grow by 8+% / 11,738 units, the majority within a couple miles of CBD. Last year, completions dropped to the lowest level since the early 1990’s. Vacancy will remain tight with less than 3,500 units available in the five county area presently. This may be the tightest market since the early 2000’s. Asking rents will rise 5% or more, which means the housing affordability gap has closed for class ‘A’ renters with upward pressure on ‘B’ and ‘C’ renters. Actual numbers per Austin Investor Interests: 7,700 units delivered in next 12 month with a current 4.8% vacancy rate.

The above average economic growth and pro-business climate have been welcomed in Austin’s office market. Although office leasing is off over 20+% nationally, Austin has seen a net increase of 180,000 sq feet. These absorption numbers would have been larger if and Cirrus Logic and Intel had not vacated large chunks of space as they moved into their own buildings. Rents are projected to increase 2+% this year (source: Marcus Millichap).

Retail continues to be challenged nationally as evidenced by the downsizing of most retailers, except grocery and medical. That said, local retail is doing ok with over 930,000 sq feet brought on this year, and retailers are projected to absorb over 1.1 million sq. ft., the largest amount since 2007. Rents should continue to rise with some concessions in retail.

San Antonio grew employment this year by 20,500 jobs, or a 2.4% increase. San Antonio’s future continues to look bright, thanks in part to the strength of oil and gas production in the Eagle Ford Shale, which continues to strengthen renter demand in south SA and counties south of the city. In the northwest and west, Nationwide’s new campus along with expansion in the growing bioscience sector will continue to drive the market.

The stronger job market bodes well for the local apartment market with an increase of 7,979 units under construction and 3,826 units delivered in next twelve months. Rising construction costs, particularly framing and lumber may slow down development with lower paying industries adding jobs primarily. There is some chance of higher vacancies with the amount of units coming on this year.

Corporate relocations to owner occupied and build-to-suit have caused office vacancies to increase over last year. However, the strength of the Eagle Ford Shale play and stronger housing market conditions are working to revive previously stalled developments.

Eagle Ford drilling and continued military spending has had a dramatic effect on boosting retail in San Antonio. Retail continues to improve with modest increases this year, as continued job growth in most sectors has allowed San Antonio families an increase in spending in San Antonio. Most tenants are concentrating in areas with high home sales and job growth, causing retail space demand to exceed supply this year, gearing the market toward healthy vacancy improvements and modest rent growth. Retail developers will bring 625,000 square feet of space online in 2012, adding to the 674,000 square feet of space that came online last year.

Houston’s economy continues to remain well positioned with over 95,000 jobs created this year. A 3.65% increase in employment will continue to feed housing, office and retail absorption

Metrowide, over 10,500 apartment units are under construction with another 18,000+/- planned. While new apartment supply doubles from 2011, demand outstrips development putting pressure to raise rents and fewer concessions from land lords, particularly in class A complexes. With the potential of overbuilding, and with average Class A vacancies below 7% and rents spiking, developers have been hustling to be first in line to bring new multifamily product out of the ground and to the Houston inner loop market.

After 1.6 million square feet of office space was completed last year, developers will have a slower year in 2012, delivering around 450,000 square feet. With the strength of the energy sector and all its support industries, CBD and the energy corridor have put pressure on raising rents. That has been offset by slower interest in non-core areas such as Greenspoint where office leasing continues to be a challenge. Because of the strength of employment, many institutional investors continue to show high interest in core office space with continued optimism.

With over two times the national employment growth, retail continues to buck the national trend with 1.2 million square feet of new space and 826,000 last year. There has been a flight to quality on the loops and areas of high housing growth and should continue into 2013.

The Dallas/Fort Worth economy has turned the corner with over 89,000 jobs created last year, a 2.8% increase. Of all four major metros, D/FW has lagged behind the others in returning to prerecession employment. However it is doing better than most of the country at 97% recovery. The economic slowdown and hesitancy to build is apparent in the tightness of the market.

With apartment occupancy at 95%, and a limited number of new apartment communities coming on line (8100+/-), rents should continue to rise and lease negotiation should remain firmly on the sides of the landlords. The biggest competition for rentals continues to come from the large amount of foreclosures in D/FW. Dallas is closer to the statewide foreclosure rate, with 1 out of 1100 units in potential foreclosure. Fort Worth continues to be challenged with 1 in 750 in potential foreclosure. Because of this, apartment developers have focused primarily on the Dallas metro of new development.

The Dallas/Fort Worth office market will continue to post modest gains in occupancy as new supply continues to lag behind demand. Just 350,000 sq. ft. will come online this year, more than doubling last years output of 161,000 square feet. D/FW vacancy is still challenged at 80 to 85% occupancy and over 40 million square feet available. However, with lack of new construction, it is allowing rents to improve for lessors. Dallas offices include the homes of 24 Fortune 500 companies. Projections indicate that the year 2013 may well see a gross area domestic product of $389 billion for this area.

Demand for retail continues to tighten the market. Over 2.1 million square feet of new retail space is planned to be finished by the end of 2012, a 100% increase over last year. Occupancy is good at 90% and should continue to improve with the uptick in housing demand in the outlying suburbs.
Commercial real estate in rural Texas towns has also improved from demand in the energy sector as evidenced by the strength of rents south of San Antonio and in the energy counties around Midland/Odessa. Barring a catastrophic event in the Texas economy, we should continue to see strength in most portions of the commercial market in our state.